TREASURY DEPSEC'S MEETING WITH FOREIGN MINISTER

S E C R E T SECTION 01 OF 04 MADRID 002685

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NOFORN
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DEPARTMENT FOR EUR/WE

E.O. 12958: DECL: 10/19/2016
TAGS: EAID EINV EFIN PREL PARM ETTC KIPR SP
SUBJECT: TREASURY DEPSEC'S MEETING WITH FOREIGN MINISTER
MORATINOS


Classified By: ECONCOUNS WHITNEY BAIRD PER 1.4 (B/D)

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SUMMARY
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1. (C) Foreign Minister Moratinos told Treasury Deputy
Secretary Kimmitt October 19 that Spain strongly supports the

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Iraq Compact and that Madrid would transfer the 22 million
dollars it had pledged for the Basra Children's Hospital
within about one month. He also pledged Spanish support to
interdict Iranian financing of terrorist groups. End Summary.


2. (C) Treasury Deputy Secretary Robert Kimmitt visited
Madrid October 18-19 to discuss the Iraq Compact, efforts to
interdict terror finance, and investment issues. The Deputy
Secretary met with Foreign Minister Miguel Angel Moratinos,

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Deputy Interior Minister Antonio Camacho, National Security
Advisor Carles Casajuana, MFA Counterterrorism Coordinator
Angel Lossada, Secretary of State for Budget and Fiscal
Matters Carlos Ocana, and groups of businessmen and bankers.
This cable reports the meeting with the Foreign Minister.
The other meetings will be reported septel.

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IRAQ COMPACT
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3. (C) Moratinos opened the meeting by stressing that
notwithstanding U.S.-Spain "misunderstandings" on Iraq after
the Zapatero,s Government's election (e.g., the 2004
withdrawal of Spanish troops from Iraq),Spain wants to
"focus on the future" and has a "political commitment to help
build a democratic, stable, and prosperous Iraq." The
Foreign Minister underscored that Spain shares the U.S.'s
commitment to Iraq and wants to work "hand in hand" with the
U.S. on Iraq.


4. (C) Moratinos said Spain would offer political support
to the Iraqi Government and would continue to support the
efforts of the international community on Iraq. Spain's only
caveat remains "no Spanish troops" in Iraq. Moratinos
indicated that Spain continues to assist the Iraqi military
and security forces (e.g., demining training) and had pledged
300 million USD for Iraqi economic and development assistance
at the 2003 Madrid Donor's Conference.


5. (C) The Foreign Minister said Spain needed to review how
it could help Iraq vis--vis the Iraq Compact and indicated
that Spanish assistance would be disbursed via the World Bank
and UNDP. He said Spain would emerge as the "fourth or
fifth" leading European donor to Iraq. Moratinos reiterated
Spain's commitment to provide 22 million USD to help
construct the Basra Children's Hospital and said he had been
"honored" to receive a letter from the First Lady thanking
Spain for its contribution to the hospital. He said that
Spain has still not finalized the transfer details for the
monies but underscored Spain's political commitment to make
this contribution.


6. (C) Injecting a cautionary note, Moratinos said Spain
has other pressing priorities such as the Palestinians,
Lebanon and stemming migratory flows to Spain. He also asked
Kimmitt not to "forget that Spain does not play in Europe's
second division" and suggested that Spain should be at the
table when issues relating to Iran are discussed. He also
cited Spain's troop contributions in Afghanistan and Lebanon
and complained that "Spain never got public encouragement
from the U.S." for agreeing to send troops to the UN's
Lebanon PKO.


7. (C) Deputy Secretary Kimmitt began his remarks by noting
that "Spain plays in the first division and that is why I am
here." He said the U.S. appreciates Spain's important role
in Lebanon and throughout the region. He acknowledged past
differences with Spain on Iraq but agreed that both sides
should focus on the future. Kimmitt said the 2003 Madrid
conference had played an important role in channeling
assistance to Iraq and that those pledges need to be
delivered. Additional help is required and that help could
be provided through the Iraq Compact process.


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8. (C) Kimmitt underscored that unlike Afghanistan, Iraq
should be self-sufficient within five years, and that after
five years, Iraq should need investment and not assistance.
But political stability has to be achieved first. As a
result, Iraqi PM Maliki has launched a three-step program to
achieve security, reconciliation, and development. Maliki,s
new government approached the UN and World Bank to set up the
Iraq Compact, through which it would pledge to implement
certain economic reforms in return for five years of
development assistance. Several successful prepcons have
been held (e.g., Abu Dhabi, Singapore, and New York) and a
further prepcon is scheduled for Kuwait City on October 31.
Maliki is scheduled to be in Saudi Arabia discussing the
possibility that the Iraq Compact closing conference could be
held in that country in late November or early December.


9. (C) Kimmitt said the meeting in Kuwait should close the
issue of the economic reforms that Iraq will undertake and
that November would focus on donor strategy, including issues
such as debt forgiveness, Kuwait reparations, and development
assistance. He said Iraq will have a budget gap that it will
need help closing. Steadily rising oil revenues should
ensure that the gap is relatively small. He said the U.S.
contribution vis--vis the Iraq Compact would likely focus on
assistance to the Iraqi security forces and that others,
perhaps including Spain, could focus on development and
reconstruction efforts. Kimmitt said that Iraq will soon
have enough oil revenue to pay for the day-to-day operations
of the government but will still need help in providing the
capital investment necessary to rebuild.


10. (C) Moratinos responded by saying that "Maliki is
strong and is trying his best." He said that Spain agrees
with the Iraq Compact approach outlined by Kimmitt and would
determine its contribution once three things had become
clearer: (a) the extent of Iraq's budget gap; (2) Iraq's
outstanding development/reconstruction priorities; and, (3)
the availability of funds in Spain. The Foreign Minister
then turned the floor over to de Laiglesia, who outlined
Spain's current programs in Iraq.


11. (C) De Laiglesia said that Spain had already disbursed
over 222.5 million USD of its 300 million USD pledge at the
2003 Madrid Donor's conference. (Note: 160 million was
disbursed in 2003-04, and the remaining 62.5 million since
2005.) Much of the 62.5 million disbursed since 2005 was
passed through EU programs and the UNDP's IRFFI program. The
77.5 million USD left (which is supposed to be disbursed by
2007) is in the form of soft loans (known as FAD credits in
Spain). De Laiglesia explained that Spain has encountered
two problems in trying to disburse the 77.5 million USD in
FAD credits: (A) its inability to obtain necessary
"sovereign guarantees" from the Iraqi Government; and, (B)
the reluctance of Spanish businessmen to undertake projects
in Iraq (since the credits are supposed to be used by Spanish
contractors). Moratinos interjected at this point that
Spain was considering having Spanish companies use Turkish or
Jordanian sub-contractors to overcome the reluctance of
Spanish companies to operate in Iraq. Finally, De Laiglesia
noted that the Spanish Agency for International Cooperation
(AECI ) for which he is the number two ranking official) has
a bilateral program in Iraq which provides roughly 7 million
euros a year (channeled bilaterally as well as through NGOs
and UNDP) to good governance, democracy, and gender programs.


12. (C) De Laiglesia said that Spain's 22 million USD
contribution to the Basra Children's Hospital would be
channeled via the UNDP/IRFFI/Health Cluster, with a special
earmark for the hospital. He said that for "bureaucratic
reasons," this was the only transfer route that worked for
Spain. He said that just last week, Spain and the UNDP
signed the document that would allow the UNDP to receive
these funds. He indicated they would be transferred after
Spain overcame several other bureaucratic hurdles, including
formal approval by the Spanish Cabinet. After the Ambassador
pressed for a specific date vis--vis the fund transfer, De
Laiglesia said he hoped the transfer would take place in
about one month's time and Moratinos indicated that he would
"try to speed it up."


13. (C) Moratinos requested that the USG intercede with the
Iraqi Government to help obtain the sovereign guarantees that

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would permit Spain to disburse the remaining 77.5 million
euros in FAD credits. Kimmitt said we would do so and then
turned the conversation toward debt relief, noting that Iraq
could never move from aid to investment without enough debt
relief to permit future access to capital markets. He said
the U.S. had forgiven 100 percent of Iraq's debt to the USG.
Moratinos said Spain had forgiven 80 percent of Iraq's 482
million euro debt to the GOS.


14. (C) Kimmitt told Moratinos that EC Commissioner for
External Relations Ferrero-Waldner had told him earlier in
the week that EU assistance to Iraq would decline in 2007 and
totally disappear by 2010. He stressed to Moratinos that
this would send a bad political signal regarding the EU's
commitment to Iraq. We all want to move from assistance to
investment, Kimmitt added, but now was not the time to begin
cutting assistance. Moratinos said that multiple crises had
left the EC short of funds, but he agreed that cutting EU
assistance to Iraq just as the Compact was being launched
would be a bad sign and that he would argue against it.
Finishing the Iraq part of the conversation, Moratinos told
Kimmitt "don't worry, we will continue to support Maliki and
we will not disengage."

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IRAN TERROR FINANCE
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15. (S) Moratinos turned the conversation toward a paper
that Kimmitt had sent to him the previous day (documenting
Iranian Government financing of terrorist groups through Bank
Saderat). Moratinos said Spain would fully cooperate in
efforts to cut off terrorist group access to financial flows.
He asked how Spain could help in this particular case, as
the Iranian bank in question had no branch in Spain. Kimmitt
said this Iranian bank could have a correspondent
relationship with a Spanish back. Moratinos said he would
look into this.


16. (S) Kimmitt said he had provided the paper to Moratinos
mostly as a courtesy, since he had also given it to GOS
officials at the Interior Ministry and Bank of Spain. He
described the over-arching issue as legal and regulatory vice
a UNSC sanctions obligation. He said the USG was not trying
to be extra-territorial but merely wanted to share with its
close Allies information pertaining to the financing of
terrorism and weapons proliferation. Kimmitt said that we
would continue to provide this information via standard
intelligence and law enforcement channels, but that he also
wanted to sensitize GOS policymakers to the importance of
these issues.


17. (S) Kimmitt said that "Spain has not been a problem in
this area" and that "Spain has a very good record" in
combating terrorism finance. But the U.S. believes that
efforts to close down traditional routes of Iranian
Government financing to terrorist groups could lead Iran to
develop new routes and mechanisms. Iran may turn to Latin
America and Venezuela in particular and the U.S. is well
aware that Spanish banks have an important presence in this
region. As a result, Kimmitt had just met with key Spanish
bankers to provide a sanitized explanation of our concerns.


18. (S) Moratinos said he could "reassure totally" that the
GOS will be helpful on efforts to interdict terror finance.
He said that on his first trip to the U.S. as Foreign
Minister, he was told that Hezbollah was broadcasting its TV
station (&al-Manat8) in Latin America through the
Spanish-controlled HISPANSAT satellite. Moratinos said he
cut off this access upon his return to Spain. He said Spain
was "ready, active and aggressive" vis--vis terror finance
and would use its influence in Latin America to this end. He
asked Kimmitt to "just let us know of problems and we will
help." Kimmitt closed the conversation by noting that Spain
has ties to Iran that the U.S. does not and that action by
Madrid to make clear to Iran that its financing of terrorist
groups, as well as its move to nuclear weapons, is simply
unacceptable and would have a strong political effect.


19. (U) Meeting attendees:

U.S. ) Ambassador Aguirre, Treasury Deputy Secretary

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Kimmitt, ECONOFF Forder (note taker),ECONOFF Schonander, EB
Financial Economist Alexei Monsarrat.

Spain - Foreign Minister Miguel Angel Moratinos, Secretary
General (U/S equivalent) for International Cooperation Juan
Pablo de Laiglesia, Director General (A/S equivalent) of
Foreign Policy for Europe and North America Jose Maria Pons,
Foreign Minister's Chief of Staff Javier Sancho Velazquez,
Foreign Minister staffer Laura Garcia Gomez (note taker).


20. (U) Deputy Secretary Kimmitt has cleared this cable.


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